Halyard’s Weekly Wrap
our thoughts on the past week’s market activity, economic releases, and Federal Reserve commentary
our thoughts on the past week’s market activity, economic releases, and Federal Reserve commentary
4/26/24 – Solid US Economic data supports higher interest rates for longer theme
On the back of strong retail sales in the last three months we were expecting that the first pass of Q1 GDP would come in above expectations. When the results were released yesterday, the tally fell well below the 2.5% consensus expectation, showing that annualized growth slowed to 1.6%. Digging through the details yielded a mixed conclusion. Personal spending, the main driver of growth, rose 2.5%, below the 3% consensus expectation, but still supportive of the view that consumers continue to spend.
Subtracting from GDP was the sharp spike in imports. In Q1 imports grew at an annualized pace of 7.2%, the strongest growth since Q3 2022. In the calculation for GDP, imports subtract from growth, meaning GDP would have been higher had the import number been excluded. But it’s also a sign of strong consumer demand.
The final surprise in the GDP report was the personal consumption deflator, ex food and energy. That’s the inflation index that the Fed has touted as their bogey for inflation. The Fed collectively declared victory when the Q4 measure totaled 2.0% but the same measure for Q1 registered 3.7%, clearly in the wrong direction for the committee. That number paired with the stubbornly high inflation rate as measured by the Consumer Price Index will reinforce the belief that the Fed will not be able to cut interest rates anytime soon.
Further illustrating the problem inflation is posing was the University of Michigan inflation expectations for the coming 12 months, which rose to 3.2%, the highest it’s been since last November. Clearly respondents are questioning the concept that inflation has been conquered.
That economic data weighed on bond yields this week, with the 2-year note briefly trading above 5% for the first time since last November, and the 10-year note closing the week just shy of 4.70%, also the highest it’s been since last fall.
Next week is likely to be a volatile one with the conclusion of the FOMC meeting on Wednesday and the April employment report on Friday. The FOMC is widely expected to leave rates unchanged, but traders will be eager to hear how the committee views any changes to the overnight interest rate in the coming months, especially given Q1’s economic strength.
The expectation for non-farm payroll growth is 250,00 jobs added for the month, which would represent another above trend level of job creation. The unemployment rate is expected to remain at 3.8% and average hourly earnings are expected to total 4.0% year-over-year.
This commentary is being provided by Halyard Asset Management, L.L.C. and its affiliates (collectively “Halyard” or “we”) for informational and discussion purposes only and does not constitute, and should not be construed as, investment advice, or a recommendation with respect to the securities used, or an offer or solicitation, and is not the basis for any contract to purchase or sell any security, or other instrument, or for Halyard to enter into or arrange any type of transaction as a consequence of any information contained herein. Although the information herein has been obtained from public and private sources and data that we believe to be reliable, we make no representation as its accuracy or completeness. The views expressed herein represent the opinions of Halyard Asset Management, LLC, or any of its affiliates, and are not intended as a forecast or guarantee of future results. Past performance is not indicative of future results.
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Halyard’s Weekly Wrap – 11/25/22
/in Weekly Wrap/by halyardThe Federal Reserve released the minutes of their last Open Market Committee meeting at 2:00 p.m. on Wednesday, the afternoon before Thanksgiving. There are a few days on the calendar when liquidity is razor thin and Thanksgiving eve is one of them. The minutes were particularly anticipated as several Fed speakers had recently hinted at reducing the magnitude of the rate hikes going forward. That suspicion was affirmed in the “Participants View” section. The exact quote was “…a substantial majority of participants judged that a slowing in the pace of increase would likely soon be appropriate.” The key words in the quote were “substantial majority.” Remember, committee votes do not need to be unanimous; a simple majority is required, and a substantial majority tells me that they have that. We interpret that statement as the Fed communicating that the December hike will not be 75-basis points, with a 50-basis point hike more likely. The minutes also acknowledged that rate hikes impact the economy with a lag, and they are starting to see evidence of slowing. But any hint of policy action in the New Year was avoided entirely.
Halyard’s Weekly Wrap – 11/18/22
/in Weekly Wrap/by halyardThe Federal Reserve has aggressively raised rates this year beginning in March – with 6 consecutive increases in the overnight target rate. The Fed has gone from 0% to 3.75% in eight months and is expected to increase rates another 50bps to 4.25% at its upcoming FOMC meeting on December 14th. Fed Fund futures markets expect a terminal rate of 5.06% by June 2023 – implying another 75bps are in the pipeline over the next six months.
Halyard’s Weekly Wrap – 11/11/22
/in Weekly Wrap/by halyardFinally, a downward bias to the Consumer Price Index! That’s not to say that prices are contracting. In fact, taking it at face value, the inflation numbers are still too high. But the rate of increase is falling, which is welcome news for consumers. Core CPI, the measure that excludes food and energy, rose 6.3% year-over-year, falling from a year-over-year increase of 6.6% last month. On a month-over-month basis the measure rose 0.3%, down from 0.6% last month. That’s a welcome improvement and comes just in time for the Fed.
Halyard’s Weekly Wrap – 11/04/22
/in Weekly Wrap/by halyardThe Fed’s well publicized “leak” hinting that the Central Bank would raise the Fed Funds rate by 75 basis points this week, but that another hike of equal magnitude in December meeting was not a certainty proved at least partially correct. The committee did raise rates by 75 basis points and, with it, offered a new sentence to the statement: “In determining the pace of future increases in the target range, the committee will take into account the cumulative tightening of monetary policy…” It was a written acknowledgment that the committee realizes that they have already tightening aggressively and, importantly, policy change works with a lag. However, Chairman Powell’s tone 30 minutes later, at the post-meeting press conference, was decidedly hawkish. We weren’t the only managers to be fooled by the head fake. Bond traders immediately took rates higher. May 2023 Fed Fund futures had rallied to 4.805% on the day of the “leak,” but have since reversed and are closing out the week at 5.12%. Similarly, the 2-year note which traded down to recent low of 4.30% reversed violently and are closing out the week at roughly 4.71%, the high for the year.
Halyard’s Weekly Wrap – 10/28/22
/in Weekly Wrap/by halyardLast week’s Fed leak that they would consider slowing the trajectory of rate hikes at the November 2nd FOMC meeting continued to dominate trading this week. Consensus seems to be developing that the recent softening of economic data will force them to temper their hawkishness and will raise the overnight rate 75 basis points next week and another 50 basis points in December. Reflecting that, the 5-year note fell to 4.06% before closing the week at 4.18%, on the back of a stellar auction on Wednesday. The auction cleared at 4.192%, through the presale when-issued yield of 4.21. The bid to cover rose to 2.48 times versus 2.27 times at the last auction, indicating that demand was high
Halyard’s Weekly Wrap – 10/21/22
/in Weekly Wrap/by halyardA Wall Street Journal story released this morning suggested the Fed would raise rates by 75 basis points at the November FOMC meeting but would then evaluate the need and magnitude of a December rate hike. The market had been anticipating 75 basis point hike at each of the meetings. As we’ve seen in the past, most notably in June when the Fed leaked that they intended to raise rates by 75 basis points, the Fed will leak their intentions in an effort to prepare the market for a change. Whether it was a deliberate signal or cover for St Louis Fed President Bullard’s ethical gaffe, the market heard it loud and clear. The two-year note fell 14 basis points on the day as did Fed Fund futures. The peak in Fed Fund futures continues to be May 2023.